In light of the ongoing threats to business posed by the COVID-19 crisis, we’ve prepared the following guidance to assist sole traders and limited companies. For more information on what measures are available to you now and in the future to protect you and your business, please follow one of the following two links that’s most relevant to you:
Sole traders – How to manage money risks when you’re a sole trader
Ltd companies – Managing and taking money out of your limited company
As well as updating our guidance, we’re also keeping up to date with the latest announcements over on our blog:
You may also want to keep up to date with the government’s own COVID-19 guidance and documentation via the gov.uk website
If you're unable to run your business during this time, you should talk to your accountant and to your bank as soon as possible. They know of, and have early access to, the finance options that will be most suitable, and fastest, to help your particular business.
Update: 4th May 2020
The government have announced today that those people making a claim under the self-employed income support scheme must do so directly themselves. In other words, an accountant can not submit claims on behalf of their clients (although they may be able to help prep an application).
The claims service is due to open on 13th May, sooner than originally thought. When it does go live, those making a claim will need to do so via the government’s HMRC gateway, using their HMRC account details, also known as your Government Gateway ID.
In order to make your claim as quickly as possible, head to the government’s HMRC services site now and attempt to log in to make sure you have access. If not, setup is fairly straightforward, but may well delay your ability to make a prompt application once the scheme begins.
Questions we answer in this guide?
- What different factors should employers use to help set their employee's wages?
- What are the different types of pay systems available to employers?
- What is PAYE and when are employees exempt from it?
Setting the right wage is important to get right, from the start. And it's not just because there are legal rules dictating the minimum amounts that you can pay an employee - and penalties for not complying with them.
Salary and benefits packages are proven to have significant influence over employee morale and motivation, and it'll be a lot easier to attract high-performing, conscientious candidates when you're offering a well-paid position.
At the same time, wages are a huge part of a business' costs, and they impact profit margins just like any other business expenses.
If you're an employer, you have to balance what the law requires with what you can afford and also, to some extent, what your values and culture stand for. It's sensible to roll wage setting into an overall, coherent HR strategy that can apply to all recruiting and salary review activities, rather than to reactively address what you should be paying someone each time a new employee joins or salary review time comes around.
What to consider when setting an employee's wage:
1. Keep in line with the National Minimum Wage/National Living Wage
The National Minimum Wage applies to employees under 25.
The National Living Wage applies to those over 25.
So, the first step in setting wages is to check the current amounts and ensure that, as a minimum, you’re acting lawfully by paying each relevant employee those wage amounts.
You can check the current amounts here. They are mandatory.
There’s also quite a long list of those who are not entitled to the minimum levels. You can check the latest list of these candidates here.
2. Consider the National Living Wage for under 25s too
The National Living Wage has been calculated to show the amount on which the UK government anticipates someone could be reasonably expected to live in comfort.
Though you’re not legally required to pay it to relevant employees under the age of 25, if you can afford to do so, the government encourages you to base your wage setting for under 25s on this higher level instead.
3. Take into account industry standards
If you’re hiring someone for the first time, or from an industry or with a skillset that you’re not too familiar with, you may not know where to start when setting a fair and competitive wage.
One approach you could take is to go onto the specific industry association’s website (most industries have one) and see if they have an annual report. You can usually download these free of charge, and they’ll likely show the average earnings from a survey of their members over the past year.
Online recruitment sites may also be helpful sources of comparisons, and they sometimes conduct their own salary/earnings reports that are freely available too. Google, LinkedIn and Facebook may also help with extra evidence in support of your search. Online discussion forums and groups are often a good source of advice in response to these sorts of questions.
If you’re still unsure, you could also simply state ‘salary negotiable’ on your recruitment documents and allow the candidates to share their current and/or future salary expectations with you.
4. What type of pay system to use
You have a few options here:
A time-rated pay system
Where you pay someone per hour, day, week, or year
A performance-related pay system
Where you pay someone based on the level of output they achieve
There are typically 3 different sub-categories of performance-related pay: piece work (where the employee is paid per item they produce); commission (they’re paid for completing a specific task); and bonus pay (where they are given extra money on top of their usual wage based on their performance).
It’s really up to you what system to choose. Again, however, industry comparisons may be helpful in pointing out the sensible choice. And if you’re just starting out, try to stick with something relatively simple that won’t be burdensome to double-check and to administer.
5. A note on equal pay
For both ethical and legal reasons, it’s imperative that you ensure that the people who you employ to carry out the same job each receive the same level of income, regardless of their age, race, sex, disability, or whether they are full or part time.
This includes everything from basic pay, overtime, benefits, pensions, as well as working hours and holiday entitlements.
Once you have an employee’s wages decided and agreed with them, it’s important that you include them in their statement of terms and/or employment contract. This way, if there’s any dispute on pay in the future, you’ll have clear evidence of what was intended and agreed to.
How do National Insurance contributions and PAYE/income tax work?
National Insurance contributions are mandatory by law. NI is essentially a tax paid by workers, their employers and the self-employed. It's used to fund state benefits. It's different from, and is paid in addition to, Income Tax.
Employers are responsible for deducting Income Tax and National Insurance contributions from employees' wages and paying them to HMRC each month.
One of the easiest (and often most cost-effective) ways to manage this is to pay for expert payroll services from an external provider.
The Employment Allowance can entitle you to a reduction in National Insurance contributions if you meet certain criteria set by the government. The link here will help you work out if you're eligible for this relief.
PAYE is HMRC's system to collect Income Tax and National Insurance contributions from employees ahead of them being paid their wage by their employers. It's a mandatory requirement for employers, and they must operate it as part of their payroll arrangements.
There are some exceptions to having in place a PAYE arrangement. For example, employers don't need to register for PAYE if all their employees are paid less than £118 a week and none receive expenses or benefits. (Pay here includes tips, bonuses, sick and maternity pay.) However, even when an exception applies, the employer must keep payroll records. You can find out more here.
Want to know more about employment law?
We've picked out some other guides that may be of interest – you'll find them on this page ready for you to browse.
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